Weekend Update #171
Thank you for your continued support and engagement. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.
Stocks had their best week of 2024 as optimism stems from Wednesday’s FOMC meeting. The Federal Reserve opted for no change to its SEP projection of three cuts in 2024 per its dot plot, despite recent CPI readings that came in higher than expected, and raised its 2024 real GDP growth forecast from 1.4% to 2.1% year-over-year. The Fed did, however, lift the dots for 2025 and 2026, suggesting more gradual cuts than previously expected. Jobless claims from last week also suggest the labor market remains resilient, with initial claims decreasing from the prior week, while continuing claims got a slight bump. The S&P 500 is now up 27% since October — on track for the biggest-ever advance since at least 1970 ahead of a likely monetary-easing cycle, according to data compiled by Ned Davis Research and Bloomberg.
Additionally, the House passed a $1.2 trillion government funding bill on Friday, hours before the midnight deadline, to avoid another government shutdown scare. Many conservatives were against the bill, and Congressman Greene threatened to file a motion to vacate the Speaker of the House, Mike Johnson, in retaliation.
Company Specific Highlights from the Week:
Nvidia (NVDA) unveiled its next-generation AI software, “Blackwell,” along with its newest chip, the GB200, which is expected to be even more powerful than the Hopper H100s.
Apple (AAPL) was sued by the DOJ for antitrust violations as a result of “exclusionary” behavior by the tech giant
Reddit, Inc. (RDDT) IPO’d at $34 per share, valuing the company at $6.5 billion, before popping to over $57 on its NYSE debut.
Lululemon (LULU) plunges on a lower-than-expected guidance for the year as the retailer sees weakness from U.S. consumers.
Tesla Inc. (TSLA) has reportedly reduced production at its plant in China amid sluggish growth in electric-vehicle sales and intense competition in the world’s biggest auto market.
Weekly Index Performance
S&P 500 5,234.18 +2.29%
DJIA 39,475.90 +1.97%
Nasdaq 16,428.82 +2.85%
Key Economic Readings Next Week
Monday March 25th — New Home Sales
Tuesday March 26th — Conference Board Consumer Confidence
Thursday March 28th — GDP, Core PCE Price Index, Univ. of Michigan Sentiment, Jobless Claims
Friday March 29th — Personal Income, PCE Deflator
Thank you Blue Room Analyst NICK PEART
Fund One ended the week on a high note despite generating about half of the 2.2% return of the S&P 500 for the week. On Friday, short position Lululemon fell 15.8% after giving disappointing quarterly and full-year guidance. Inline with our projections, the athletic apparel retailer is signaling that middle to upper income consumers are pulling away from the athleisure category. Core holding Nvidia also continued its ascent and was one of the biggest contributors to performance.
Biopharmaceutical company, Atai Life Sciences, was once again a performance detractor but is up nearly 40% over the past year. Although Nvidia is lifting performance, other semiconductor related companies such as our long position in Advanced Micro Devices and our shorts on Lam Research and Synopsys moved against us this week. We are continuously monitoring each holding at the fundamental level as well as assessing our overall exposure to the sector and we are comfortable with our current positioning.
Thank you Blue Room Investing President JOHN FENLEY
Executive Overview
As the United States consumer has shown a clear pullback in spending over the past year, discretionary goods spending has remained at the bottom end of growth. Lululemon had been fortunate enough to be shielded from most of the variability in athletic apparel spend, but the company’s full year revenue guidance (9% to 10% growth excluding the extra week) indicates that middle-to-upper income consumers are also pulling away from the athleisure category. At the same time, the company is pursuing a brand awareness strategy to increase its exposure. In F2022, Lululemon’s unaided awareness was 25%, which then grew to 31% in F2023. After several years of organic brand marketing, Lululemon appears to be activating their advertising campaigns more aggressively in light of the consumer pullback. This is evident in below expected profitability for the first quarter, marked by 135 bps of deleverage in SG&A on marketing spend and only 10 bps of potential leverage for the full year.
Geographically in the quarter, we saw North America sales grow 9% YoY, versus 29.0% in FQ4 of 2023. The notable slowdown comes despite the company citing a 20% increase in traffic. This means that lululemon is either having trouble with conversions, or spend per customer has decreased. That could be a bane for future growth if inflation remains persistent. Offsetting the deceleration, however, is the continued strength of international markets, where China continues to be the growth driver, increasing 44% on a same store sales basis. We model the company opening at least 17 stores in the region to continue to drive growth.
Overall, we are beginning to see a chink in the armor for Lululemon, which has begun in the U.S. If those trends are delayed and the effect permeates to other geographies, the company could be set to revise their current full year forecast lower still. Inclusive of more brand awareness strategies, margins could significantly deleverage, especially with only an incremental 10 bps of operating leverage forecast for the full year.
Dave Risinger — Leerink Partners
Well, good afternoon, everyone. My name is Dave Risinger. I cover diversified biopharmaceuticals for Leerink Partners, and it's very much my pleasure to welcome two members of the Vertex leadership team. Immediately to my left is Chief Scientific Officer, David Altshuler; and to his left is CFO, Charlie Wagner. So I wanted to thank them for coming in from Boston to be with us here today. And obviously, the Company has had tremendous momentum and delivered some very compelling data. So once again, thank you for taking the time.
I know that you have a lot more work ahead as well. Why don't we start with pain? It would be great to hear what you're hearing from the field. What perspectives physicians are sharing with you on VX-548?
Charles Wagner — Executive VP and Chief Financial Officer
Yeah. Listen, David, thanks for hosting us today. We appreciate the opportunity, and maybe before I dive into that, just a couple. So you mentioned the great data. We have had quite an exciting 100 days or so. Since early December, we've announced multiple regulatory approvals for CASGEVY. We released data in our Phase 2 DPN trial, data in our Phase 3 acute pain trial, data in our Phase 3 vanza trial in CF, reported the fourth quarter and gave guidance for the year.
So it's certainly been a very busy and exciting time for us over the last few months. And with that, though, we're excited to kick off 2024, continued execution in CF, successful CASGEVY launch, moving programs to the clinic, including the pain program, which you described.
So on pain, we released very positive phase 3 results in acute pain. Recently, we are incredibly excited about the opportunity in VX-548, which is our medicine, has the potential to be the first class of new pain medicine in decades. As you know, today physicians and patients essentially have a choice between NSAIDs and opioids for moderate-to-severe acute pain, and say it have limited effectiveness. Opioids have greater effectiveness, but a significant burden of side-effects, including the potential for addiction. VX-548 we think stands out remarkably in that setting as a medicine that is both effective and safe. And certainly, that's shown in the Phase 3 results and David can comment on that.
In terms of reaction so far, it's been overwhelmingly positive. We expected that. With VX-548, we have a steering committee consisting of a dozen or so doctors who are experts in pain. They've been enthusiastic about the program all along and we're really thrilled with the data that we released. We've done market research. We've talked to 600 or so physicians, including orthopedic surgeons, plastic surgeons, anesthesiologists, pain experts, et cetera. Among those 600 physicians, the overwhelming majority are interested or very interested in prescribing a medicine like VX-548 because they really don't have any great alternatives today.
FOMC Statement
March 21, 2024
2:00 p.m. EDT
Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-¼ to 5-½ percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas l. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowan; Lisa D. Cook; Mary C. Daly; Phillip N. Jefferson; Adriana D. Kugler, Loretta J. Mester; and Christopher J. Waller.
Executive Summary
Nike outperformed the guided range for revenue in the quarter, coming in at $12.429 billion, or plus 0.31% YoY, versus the original quarter guide for “slightly negative”. North America, Greater China, and APLA all grew above corporate average, while EMEA and the Converse brand were negative offsets. Nike stock fell due to the underwhelming growth profile for fiscal 2025, with the first half pressured by a continuation of trends set in fiscal ‘24. FQ4 ‘24 guidance was also weak on sales, falling short by about $100 million.
Moving forward, it is difficult to find a growth catalyst in North America for the next three quarters, as evident by the muted retail spending trend entering the new year, however we do see potential for international markets to engage athletic apparel spending going into the 2024 Olympics in Europe. Management also noted strong responses to activations in Latin America during the quarter.
The direct channel seems to be softening as consumers spend more time shopping in store while decreasing attention online. Online sales changes of +1.0% in North America, -10.0% in EMEA, -13.0% in Greater China, and -6.0% in APLA. Conversely, store channel sales changed +3.0% in North America, +6.0% in EMEA, +6.0% in China, and +18.0% in APLA. Nike is acting on this trend by investing more in stores and wholesale partnerships to meet customers where they shop.
Nike highlights several themes where the company seeks to improve performance; (1) New product innovation cadence; (2) Reinvesting and realigning wholesale branding to be more in line with how the company wants itself presented to consumers; (3) Increase marketing identity and frequency; and (4) Sharpen a focus on sport.
Regarding guidance, management is taking a cautious approach to the next three quarters, forecasting a sequential increase in reported revenue of around $12.95 billion (or up around 1.0% YoY) and a 1H24 that will be roughly 2.50% lower than 1H23 by our estimates. For 2H24, Nike expects the final two quarters of the fiscal year to inflect back to growth, effectively offsetting the declines in the first half. Nike is expected to have single digit growth for F2024. The company also intends to continue building on adjusted margin growth for Fiscal ‘24.
Executive Summary
Micron’s second quarter highlighted the strength of the company’s memory portfolio, especially as a key component to accelerated server systems. The company directly stated that AI is the primary driver of higher ASPs quarter over quarter, which more than offset declining Bit volumes industry-wide. Micron’s HBM3e product is the primary memory component of the GH200 supercomputer, which is forecast to go into volume production for the company in F3Q 2024. Within that, we estimate further greenshoots as the Blackwell GPU ramps to production, further lifting memory content per server system sold, and driving revenue for Micron. Additionally, as the industry limits supply and WFE expense, memory and storage prices continue to increase across a broad range of products. Most end markets appear to be responding; PCs and Smartphones are returning to modest growth, industrial has rebounded from cyclical troughs, and Data Center spend is durable for GPUs.
In a better pricing environment and with continued constraints to WFE CAPEX, we now forecast positive FCF in 3Q24 and 4Q24, which pulls in the forecast from 4Q24 prior. Within that forecast, we also estimate GAAP profitability in F2H24.
From a high level, revenue came in at $5.824 billion, above the consensus estimate for $5.355 billion and above BLUE ROOM estimates of $5.339 billion. As predicted, marked down inventory from FY2023 sold into a higher current pricing environment drove gross margin expansion from -0.74% in 1Q24 to 18.5% in 2Q24. This was above BLUE ROOM estimates for 12.7% and consensus 13.6%. An adjustment to tax accounting in the quarter added $662 million to positive operating income of $191 million, and was the primary driver of EPS outperformance of $0.71 versus BLUE ROOM’s estimate of $(0.33) and consensus $(0.24).
With respect to guidance, further pricing gains in memory and storage will contribute momentum. For HBM specifically, Micron is fully sold out for 2024, and well booked for 2025. Additionally, higher ASP mix due to AI servers going to market in 3Q24 and beyond will provide a lift to sales and margins. For the third quarter, Micron expects $6.600 billion in revenue, above BLUE ROOM’s estimate for $6.498 billion and above consensus expectations of $5.991 billion. Gross margin is guided to by 25.5% against consensus expectations for 20.40%. EPS is guided to $0.17 versus $0.08 BLUE ROOM expected and $(0.01) consensus expected.
10% OF ALL BLUE ROOM REVENUES GO DIRECTLY TO FUND OUR NON PROFIT TOGETHERISM.
WE CAN ACCOMPLISH ANYTHING TOGETHER.
These materials do not purport to be all-inclusive or to contain all the information that a prospective investor may desire in considering an investment. These materials are intended merely for preliminary discussion only and may not be relied upon for making any investment decision. Any discussion or information contained in this presentation does not serve as a receipt of, or as a substitute for, personalized investment advice from Blueroom or your advisor.
This publication does not constitute an offer to sell or a solicitation to buy any securities in any fund, market sector, strategy or any other product. Investing is speculative and involves substantial risks (including, the risk of loss of the investor’s entire investment). Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable.
For more information about us and our general disclosures contact us directly.